NEW YORK (AP) — Stocks were a mixed picture in late-day trading Friday as a surprisingly strong October jobs report prompted investors to position themselves for higher interest rates as early as next month.
Bank stocks rose, helped by the possibility of higher interest rates, while dividend-paying stocks like utilities sank. Bond yields rose sharply as bond investors reacted to the jobs number as well.
KEEPING SCORE: The Dow Jones industrial average rose 10 points, or 0.1 percent, to 17,874 as of 2:30 p.m. Eastern. The Standard & Poor’s 500 index lost five points, or 0.3 percent, to 2,095 and the Nasdaq composite rose five points, or 0.1 percent, to 5,132.
JOBS JOBS JOBS: The strong October jobs report makes the possibility of an interest rate hike by the Fed next month much more likely now, which would mean an end to the nearly seven years of near-zero interest rates that investors have enjoyed. U.S. employers added 271,000 jobs, and the unemployment rate dipped to a fresh seven-year low of 5 percent from 5.1 percent. The burst of hiring, the most in 10 months, filled jobs across a range of industries.
There was a lot riding on the October jobs report for investors. Fed policymakers have made it clear that they want to raise interest rates sooner rather than later, and are just waiting for the data to show enough robust growth to step in.
“This makes it pretty likely the Fed will raise rates in December,” said Priscilla Hancock, a global fixed income strategist for J.P. Morgan Asset Management.
Fed fund futures, which are securities that bet on which way the Fed will move interest rates, now show roughly a 74 percent chance of the central bank raising rates in December, up from 60 percent on Wednesday and up from well below 50 percent as recently as late summer. But the size of the predicted interest rate increase remains modest. Investors expect interest rates will go from their current 0-0.25 percent levels to 0.5 percent.
“The Fed is still going to be extremely accommodative for investors. A rate hike in December is removing those emergency measures that the bank put into place during the financial crisis,” Hancock said.
GAINERS AND LOSERS: The possibility of higher interest rates changes the dynamics for investors in several ways. Dividend-paying stocks, which are typically bought for their high payouts when interest rates and bond yields are low, dropped sharply on Friday. The Dow Jones utility index, a basket of 15 utility stocks dropped 4 percent.
In contrast, bank stocks rose sharply as higher interest rates mean banks can charge more for lending. JPMorgan Chase rose $1.88, or 3 percent, to $68.32, Bank of America rose 68 cents, or 4 percent, to $17.99 and Morgan Stanley rose $1.47, or 4.4 percent, $35.35.
“You just need to look at those two groups and see that the market is positioning itself for higher interest rates,” said Ryan Larson, head of equity trading at RBC Global Asset Management.
BONDS SELL OFF: The fixed income market saw major declines. Bonds become less attractive in a rising interest rate environment because investors would be buying an interest rate that could be lower than the ones available in the months to come.
The benchmark U.S. 10-year Treasury note jumped to a yield of 2.33 percent, up from 2.23 percent on Thursday, a major move for that normally-staid investment. Bonds with shorter durations saw even more distorted moves. The two-year Treasury jumped from a yield of 0.82 percent to as high as 0.92 percent after the jobs numbers were released.
ENERGY: In energy markets, U.S. crude oil fell 93 cents to $44.27 a barrel in electronic trading in New York. Brent crude, which is a benchmark for international oils, fell 53 cents to $47.45 a barrel in London.
PIPE LEAK: TransCanada fell $2.06, or 6 percent, to $32.30 after The Associated Press and other news outlets reported that the White House, after years of scrutiny, planned to reject the company’s proposed 1,200-mile Keystone XL oil pipeline.
CURRENCIES: The U.S. dollar advanced against other major currencies following the jobs numbers. The euro fell against the dollar to $1.0739 and the dollar rose against the Japanese yen to $123.21.
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